FX FX FX

FX Update: Commodities and yields driving FX moves.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Last week saw the ECB checking the advance of the euro, with the latest surge in commodity prices and threat of new sanctions against Russia putting further pressure on the single currency. Elsewhere, despite BoJ Governor mentioning FX moves overnight, the EUR and JPY are under pressure again as global bond yields pulled back higher in the European session. And the Aussie is riding high again on a modest hawkish language upgrade from the RBA overnight.


FX Trading focus: Commodities and rates in driver’s seat for many currencies. RBA upgrades language.

The Australian dollar ripped higher in the Asian session on a more hawkish tilt than expected in the Reserve Bank of Australia statement, which boosted short Australian rates back higher and even to new cycle highs. The statement removed the word “patient” in describing the board’s stance on the wait for removal of policy accommodation as it still maintains a 0.10% policy rate. The language in the statement still suggests that growth conditions may not be sufficiently robust to keep inflation in the desired 2-3% target band, and there is still the focus on wages as the key for a more significant factor in sustaining inflation. The market is nearly convinced that the June meeting will be the lift-off meeting for the RBA. But the RBA is just the latest good excuse to buy AUD in a world that has gone gaga for commodities, and Australia boasts the world’s most absurdly complete portfolio of commodities for export. Plenty of recent focus, on that account on LNG, as Australia is the world’s largest exporter, and today I became aware that as if LNG, wheat, iron ore, and coking coal weren’t enough, I became aware today that Australia is also far and away the world’s largest producer of lithium. This is one of the key components of the EV transition, and prices have spiked some 500% over the last year.

Chart: AUDUSD
The AUDUSD surged overnight to new highs, taking out the 0.7556 pivot high from last October that was respected until the other side of last night’s RBA, at which Lowe and company signaled a bit more readiness to get moving on withdrawing policy accommodation as noted above. The next chart focus is likely the early 2021 high just above the round 0.8000 level, and the near 7-year high above that is 0.8136 lies beyond there. The most likely source of resistance for this move would be a turn lower in risk sentiment, an obstruction that has not test the bulls here and in other AUD pairs for three weeks now, outside of last week’s minor wobble/consolidation.

Source: Saxo Group

The JPY was briefly jolted stronger overnight on remarks in the Asian session from Bank of Japan governor Kuroda, who answered questions before parliament overnight. He noted that that the “moves in foreign exchange seem somewhat rapid.”. This is seen as evidence that the Bank of Japan does not like the pace of recent JPY depreciation, even if the BoJ itself has commented in the recent past that a weak JPY still benefits the Japanese economy. The USDJPY exchange rate will remain sensitive to US treasury yields as was once again in evidence today on the rebound from overnight lows. That is, until or unless the BoJ or Japanese Ministry of Finance mount a more considerable campaign than throwaway verbal comments. The critical cycle high in USDSJPY is just above 125.00, still a couple of figures above today’s price action even if the US 10-year is within reach of the highest daily close of the cycle (that was 2.47% last Monday, a level that has traded today, with the highest intraday level at 2.55%).

Fed watching today and tomorrow. The Friday jobs report from the March provides plenty of further ammunition for the Fed to get busy and send out fresh hawkish signals. The official nonfarm payrolls change was a shade below expectations, but we have come to expect a steady stream of upward revisions and got a +95k boost to the prior two months’ data on Friday. More importantly, the household survey was very strong as the unemployment rate plunged another 0.2% to 3.6% despite the participation rate increasing another 0.1%, taking it just a few tenths of a percent away from the pre-pandemic range. Average Hourly Earnings rose 0.4% month-on-month. The next chance for the Fed to buy some more credibility is at a virtual event hosted by the Minneapolis Fed later today, at which Fed Vice Chair Lael Brainard will speak on inflation driving inequality. The event will feature a Q&A session. As we debated once again on today’s Saxo Market Call podcast, while some measures of financial conditions are tightening (esp. yields), others have collapsed in recent weeks (credit spreads and risky asset volatility).

The Swiss franc is firm on the ECB scotching rate expectations last week, but also on geopolitical impacts from Russia-Ukraine. The weekly sight deposit data from the SNB jumped aggressively by some CHF 6 billion last week, the largest intervention since 2020.

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY comeback of last week has so far merely proved a shallow consolidation – note the euro losing further altitude in the wake of the dovish ECB comments last week, while. AUD is the king of the hill, while CAD is trying to make its presence felt with as the lows for the year below 1.2450 in USDCAD come into view. Note Gold biding its time with a complete lack of trending behaviour, caught between the tailwind of higher inflation with the headwinds of higher yields and strong risk sentiment.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Commodity trends are stronger in many, but not all pairs, as oil is winding within the range, while AUD is shining as it can ride many different commodity horses. The odd AUDNZD reversal of last week has been wiped away and then some, with that pair re-confirming the up-trend. Watching EURCHF as the last Fibo retracements for the recent rally come into view – 1.0136 for the 61.8% retracement.

Source: Bloomberg and Saxo Group

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